Verizon nears record $45 billion to $49 billion bond deal

Wednesday, 11 Sep 2013 | 7:34 AM ETReuters

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Verizon Communications is expected to sell between $45 billion to $49 billion in bonds on Wednesday to finance the $130 billion buyout of its wireless operations, making it the biggest corporate issue on record by some distance.

The deal, which attracted over $90 billion of orders on Tuesday after the company opted for size over tight pricing, will dwarf Apple's record-setting $17 billion offering issued in late April.

A source with knowledge of the deal said "Verizon preferred to just get it all out of the way so there isn't an overhang of another potential big deal in the market."

Verizon is expected to boost bond size due to demand, CNBC's Kayla Tausche has the details.

The overwhelming response to the offering follows Verizon's decision to offer bargain basement prices for the notes, to ensure it raises the bulk of the $49 billion of multi-currency bonds it needs to help pay Vodafone for its 45 percent stake in Verizon Wireless.

The world's biggest telecom company shocked the market by offering investors official price guidance in line with initial talk, which was set purposely so cheap that investors couldn't refuse the offer.

Pricing of the deal is scheduled between 8 a.m. and 11 a.m. on Wednesday. Investors are hearing that it will raise between $13 billion to $15 billion in fixed and floating rates bonds with three-year and five-year maturities, $15 billion from 7-year and 10-year bonds, and between $18 billion to $20 billion in 20-year and 30-year bonds.

"We are hearing that the 10 year will likely be twice as big as the seven-year and the 30-year about twice as big as the 20-year," a source said.

Guidance on some of the longer-dated tranches were a whopping 135 basis points wider than where Verizon's existing bonds in comparable maturities were trading in late August, and before news of its acquisition was leaked.

Orders on the eight-tranches came thick and fast throughout the morning, growing from $30 billion at 9 a.m. EST to triple that number by the time order books closed.

Bond take-out

The Verizon bond will partly refinance a $61 billion one-year bridge loan it has taken out to pay for the debt-funding portion of the acquisition. Of the $49 billion in bond financing, its plan was to raise $5-10 billion in the euro and sterling market.

The rest of the $61 billion bridge will be replaced with about $12 billion of three and five year term loans.

The deal is so large and complex, that underwriters have decided to take two days rather than the usual one to announce and then price the deal.

The order book closed at 3pm and now bookrunners Bank of America Merrill Lynch, Barclays, JP Morgan and Morgan Stanley will spend all night deciding how many of the orders it will fill.

The hope is that Verizon will leave some demand unsatisfied, so that the deal performs when it is free to trade.

Potential volatility

Market participants said also that it made sense that Verizon would want to get as much of possible in one hit given the volatility in U.S. Treasury rates and the looming Federal Open Market Committee meeting starting on Sept. 17.

"From a capital structure perspective, paying a larger concession today is insurance against testing the market with another super sized deal in the future," said Scott Kimball, senior portfolio anager at Taplin, Canida & Habacht, part of BMO Global Asset Management.

"The latter risks potentially increasing their total financing costs beyond the amount of additional concession today."

The deal has already caused a repricing of Verizon competitors' bonds, such as AT&T and Comcast, and could affect the levels of other companies outside of the telecommunications sector, according to some investors. (Disclosure: Comcast is the owner of NBCUniversal, the parent company of CNBC and CNBC.com.)

"This deal will have investors re-evaluating bonds to see what looks mispriced compared with the levels on Verizon," said David Tiberii, a senior portfolio manager at T.Rowe Price.

He said the bond could also potentially impact pricing levels on deals in the pipeline for next week.

"A lot of excess cash has been sucked up by the Verizon deal so next week, when new deals come to market, there will either be more selling to buy a new deal, or the new deal's concession will widen out."

No chances taken

Guidance on the six fixed rate tranches was set at Treasurys plus 165 basis point area /-5bp on the three-year, T 190bp area /-5bp on the five-year, T 215bp area on the seven year, T 225bp area /-5bp on the 10-year, T 250bp area /-5bps on the 20-year and T 265bp area /-5bps on the 30-year.

Guidance on the three-year and five-year floating rate notes was set at three-month Libor plus the equivalent spread on the fixed rate notes.

At those levels, the new issue concession is around 50-85bp based on where Verizon's existing bonds were trading on Monday, but as much as 135bp based on where those bonds were trading before the $130 billion acquisition of Vodafone's 45 percent stake in Verizon Wireless was announced more than a week ago.

Jens Vanbrabant, a London-based portfolio manager at ECM Asset Management, said the guidance on the 10-year indicated a coupon of approximately 5.2 percent, which was cheap for a BBB credit.